Annaly Capital Management (NLY): A Diversified REIT Navigating Volatile Times

Published on March 08, 2025 | Ticker: NLY-PI

Annaly Capital Management, Inc. (NLY) is a leading diversified mortgage real estate investment trust (mREIT) that has navigated the challenging economic landscape with resilience. As one of the largest mREITs in the industry, Annaly has demonstrated its ability to generate consistent returns for shareholders through its well-executed investment strategies across the mortgage finance sector.

Business Overview and History

Annaly was founded in 1997 and commenced operations on February 18, 1997. The company is a leading diversified capital manager with investment strategies across mortgage finance. Annaly is an internally-managed Maryland corporation that has elected to be taxed as a Real Estate Investment Trust (REIT). In its early years, Annaly focused on investing in Agency mortgage-backed securities (MBS) collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Over time, the company expanded its investment strategies to include complementary investments within the Agency market, such as Agency commercial MBS, as well as non-Agency residential whole loans and securitized products within the residential and commercial markets.

The company primarily invests in and originates mortgage-backed securities (MBS), residential mortgage loans, and mortgage servicing rights (MSR). Annaly operates through three main investment groups: the Annaly Agency Group, the Annaly Residential Credit Group, and the Annaly Mortgage Servicing Rights Group.

The Annaly Agency Group invests in Agency MBS, which are mortgage-backed securities guaranteed by government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac. The Annaly Residential Credit Group focuses on non-Agency residential whole loans and securitized products within the residential and commercial markets. The Annaly Mortgage Servicing Rights Group invests in mortgage servicing rights, which provide the right to service residential mortgage loans in exchange for a portion of the interest payments made on the loans.

Annaly's diversified business model has allowed the company to navigate various market conditions and generate consistent returns for its shareholders. As of December 31, 2024, the company's portfolio was valued at $101.5 billion, with the Agency Group accounting for $71.7 billion, the Residential Credit Group representing $26.2 billion, and the Mortgage Servicing Rights Group comprising $3.4 billion.

One of the key challenges Annaly has faced over the years is managing interest rate risk given the sensitivity of its mortgage-related investments to changes in interest rates. The company has utilized a variety of financial instruments, including interest rate swaps, swaptions, and other hedges, in order to limit the adverse effects of interest rates on its results. Annaly has also had to navigate evolving regulatory environments, such as changes to GSE reform, that have impacted the mortgage finance industry.

Financial Performance and Solvency

Financials

Annaly's financial performance has remained strong, despite the challenges posed by the volatile market environment. In the most recent quarter, the company reported revenue of $527,457,000, net income of $482,052,000, operating cash flow of $2,808,475,000, and free cash flow of $2,646,776,000. These figures demonstrate Annaly's ability to generate consistent cash flows and maintain a solid financial position.

For the nine months ended September 30, 2024, Annaly reported total net interest income of $60.51 million and net servicing income of $320.36 million across its three business segments. The Agency segment generated net interest income of $129.41 million and net servicing income of $109.59 million. The Residential Credit segment produced net interest income of $187.13 million and net servicing income of $320.36 million. The Mortgage Servicing Rights segment generated net servicing income of $320.36 million.

Liquidity

The company's balance sheet remains robust, with a GAAP leverage ratio of 6.0x and an economic leverage ratio of 5.0x as of September 30, 2024. Annaly's liquidity position is further strengthened by its significant holdings of unencumbered assets, which totaled $5.8 billion as of the end of the fourth quarter of 2024. This liquidity provides the company with the flexibility to capitalize on market opportunities and navigate potential headwinds.

During the third quarter of 2024, Annaly raised over $1.1 billion of common equity through its at-the-market sales program, further bolstering its capital position.

Operational Highlights and Guidance

During the fourth quarter of 2024, Annaly's portfolio generated an economic return of 1.3%, with all three of its business segments contributing positive returns. The company's earnings available for distribution (EAD) per share increased to $0.72, exceeding the quarterly dividend of $0.65 per share. For the full year 2024, Annaly generated an economic return of 11.9%, indicating strong performance relative to the broader market.

As of September 30, 2024, Annaly's Agency segment's investment portfolio had a fair value of $69.15 million, representing 70.7% of the company's total assets. The Residential Credit segment's investment portfolio had a fair value of $25.90 million, accounting for 18% of total assets. The Mortgage Servicing Rights segment's investment portfolio had a fair value of $2.69 million, representing 21% of total assets.

Annaly's Agency MBS portfolio ended the year at $71 billion in market value, with the company continuing to migrate its holdings up the coupon stack to take advantage of the yield curve's steepening. The Residential Credit portfolio grew to $7 billion in economic market value, driven by the company's strong origination and securitization activities. The Mortgage Servicing Rights portfolio reached $3.3 billion in market value, including unsettled commitments, as Annaly solidified its position as one of the largest buyers of conforming MSR in the market.

Looking ahead, Annaly remains optimistic about the prospects for its diversified business model. The company expects the Agency MBS market to continue exhibiting attractive spreads, supported by improved supply and demand dynamics. The Residential Credit segment is well-positioned to capitalize on the growth in the non-QM origination market, and the Mortgage Servicing Rights group is poised to benefit from ongoing industry trends and the company's strong partnerships with originators.

While specific forward-looking guidance numbers for 2025 were not provided, Annaly's CEO, David Finkelstein, stated that earnings for the first quarter of 2025 are expected to be "contextual with where we're at in Q4," which had Earnings Available for Distribution (EAD) of $0.72 per share. Finkelstein also mentioned that the dividend "certainly feels safe" for 2025, indicating that the current dividend level is expected to be maintained.

Risks and Challenges

Despite Annaly's strong performance, the company is not without its risks and challenges. The volatile interest rate environment and changes in the regulatory landscape can have a significant impact on the mREIT industry. Additionally, the company's exposure to credit risk in its Residential Credit portfolio and the potential for increased delinquencies or prepayments in its Mortgage Servicing Rights portfolio pose ongoing risks that Annaly must navigate.

Annaly's success also depends on its ability to maintain its REIT status and continue to meet the requirements for its exemption from registration under the Investment Company Act. Any changes to these regulatory frameworks could have a material effect on the company's operations and financial performance.

Conclusion

Annaly Capital Management has demonstrated its resilience and adaptability in the face of a volatile market environment. The company's diversified business model, strong financial position, and prudent risk management have enabled it to generate consistent returns for shareholders. As Annaly continues to navigate the challenges and opportunities in the mortgage finance sector, investors will be closely watching the company's ability to capitalize on its strengths and effectively manage its risks.

MFA Financial (MFA): A Resilient REIT Navigating Evolving Mortgage Market Dynamics

MFA Financial, Inc. (MFA) is a real estate investment trust (REIT) that has established itself as a prominent player in the dynamic residential mortgage market. With a diversified portfolio spanning residential whole loans, mortgage-backed securities, and business purpose loans, MFA has demonstrated its ability to adapt and capitalize on shifting market conditions over its nearly three-decade history.

AG Mortgage Investment Trust (MITT): Navigating a Transformative Landscape

AG Mortgage Investment Trust (MITT) has undergone a remarkable transformation in recent years, evolving from a traditional residential mortgage REIT into a diversified investment platform focused on the dynamic U.S. mortgage market. With a strategic shift towards acquiring and securitizing newly-originated non-agency residential mortgage loans, the company has established itself as a key player in the non-agency segment, leveraging its vertically integrated origination platform to access attractive investment opportunities.

Invesco Mortgage Capital Inc. (IVR): A Strategic Shift Amid Volatile Conditions

Invesco Mortgage Capital Inc. (IVR) is a real estate investment trust (REIT) that primarily focuses on investing in, financing, and managing mortgage-backed securities (MBS) and other mortgage-related assets. The company has navigated a challenging market environment in recent years, marked by significant interest rate volatility, shifting monetary policy, and economic uncertainty. However, Invesco Mortgage Capital has demonstrated its ability to adapt its strategy and positioning to weather these conditions, positioning the company for potential long-term success.

MFA Financial, Inc. (MFAO): Weathering the Storm with Resilient Business Model

Business Overview MFA Financial, Inc. (MFAO) is a specialty finance company that has navigated the complex mortgage market with admirable agility. Established in 1997 and headquartered in New York, the company has steadily grown its residential mortgage asset portfolio, diversifying its investments across various sectors to mitigate risk and capitalize on emerging opportunities.